Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio

Chapter 2. The Case for Cyclical Asset Allocation

If you read enough of today’s economic literature, you find the financial community has come to agree that, on average, small-cap and value investments outperform their large-cap and growth cousins.^[1] Using monthly returns for the various asset classes since 1975, I find some interesting data that can put these rather firm conclusions into question, while also surprising many investors who came of age in the 1990s.^[2]

Not that small-cap and value investments haven’t performed—they’ve done extremely well. In the three decades since 1975, small-cap stocks have not only outperformed large-cap stocks, they’ve beaten all other asset classes. Figure 2.1 shows that, on January 1, 1975, $1 invested in ...